Negotiating an alimony settlement has always been a grueling process for both divorce attorneys and divorced couples. Unfortunately, new changes to the tax code under the Tax Cuts and Jobs Act will make this process even more complicated than it has been in the past.
In previous years, alimony agreements made between a couple getting a divorce was determined based upon the set of rules provided by each state. These rules determine the amount of money the paying spouse will have to pay each month and when the alimony agreement will cease to exist.
Under the current law, individuals paying spousal support can deduct their payments on their tax returns. While the paying spouse has the tax benefit, the spouse receiving the alimony must report it as taxable income on their federal income taxes. Historically, the person who pays spousal support has been more willing to agree to higher payments because it ultimately reduces their taxable income. In turn, this leads to the recipient spouse receiving more monthly support, which improves their financial situation.
In most situations, the current law is mutually beneficial for both spouses. However, under the new law, divorces that are finalized in 2019 will result with the person paying the alimony being required to pay tax on any alimony payments made to their former spouse. The recipient of the alimony payment will likely receive less money since their ex-spouse will have less money to pay them with.
To sum up these alimony changes, the new law will likely make “the financial pies smaller for both parties.” Early analysis of the effect that the new tax code will have on divorce proceedings seems grim. Previously, offering tax relief to alimony payers had a positive effect on negotiations during a divorce. The negotiation process would often proceed much smoother when the paying spouse knew they would have the benefit of deducting alimony payments from their taxes.
However, the new tax code will likely lead to far more divorce proceedings going to court. With an already flooded court system, this is not good news for couples looking to get divorced this year. However, the main thing to take away from what we have discussed is that the window to keep your tax deduction is still open. If your divorce is filed and finalized before January 1, 2019, the old “taxable/deductible” rule will still apply to your alimony agreement. After this date, the new rule will inevitably reduce the amount of cash available to negotiate and settle a spousal support agreement.
At The Law Office of Cary Goldstein, Esq., PC., our team of skilled lawyers have over 38 years of experience. We are familiar with alimony cases and we know how to help you reach a fair agreement. If you need assistance with your divorce case, you should immediately contact our team of Beverly Hills divorce lawyersto schedule your consultation today.